Primary among these factors is the impending rollout of the proposed Goods and Services Tax, which would simplify selling to business across states.Payal Ganguly | ET Bureau | Updated: October 28, 2016, 09:57 IST

It is not often that 60-year-old Jitendra Sharma comes across suppliers who are both polite and can get taxes right. But he’s been able to reduce such interaction with humans.

Nowadays, the joint managing director of Uttam Strips, a manufacturer of cold-rolled steel, finds it easier to order online nearly half of the raw materials and consumables he needs for his factory in Bhiwadi, Rajasthan.

An increasing number of small and medium enterprises, or SMEs, and a few large ones are choosing online platforms such as Power2SME and Industrybuying to procure routinely required raw materials and industrial products.

Online platforms bring price transparency and clean transactions without businesses having to bother about adding up the numbers later. It has not been easy for businesses to discover these platforms, though, minus the heavy discounting and ad-blitz associated with online retailers of consumer products, as Swati Gupta, co-founder of Industrybuying, says.

Even so, a number of emerging macro factors are setting the stage for India’s business-to-business e-commerce companies to make a significant leap, although they are likely to remain underdogs to their high profile consumer Internet cousins such as Flipkart and Snapdeal. Primary among these factors is the impending rollout of the proposed Goods and Services Tax, which would simplify selling to business across states.With 36 million units in India under the micro, small and medium enterprises category as per government data, the opportunity for digital platforms aggregating their requirements is massive.

India’s B2C e-commerce sector “is expected to be somewhere between $100 billion and $150 billion in five years and B2B is likely to exceed that,” said Sumit Jain, partner at Kalaari Capital, an investor in Industrybuying and Power2SME.

This year so far, domestic B2B e-commerce companies have raised $79 million from investors, near five-fold increase from all of last year a validation of the sector’s improving potential. That’s still a fraction of the estimated $9 billion domestic consumer facing online retailers raised in 2015.

Line of credit

A key factor bolstering this sector’s prospects is the easier access to credit. What differentiates online suppliers from offline vendors is the former’s limited ability to form personal relationships with business owners.

Often, it is this relationship that translates to extending credit to SMEs for their raw material needs, a requisite. The emergence of financial-technology companies and specialised non-banking financial companies focused on the SME sector has ensured that a similar line of credit can be extended by online suppliers as well.

“We usually have the registration details of customers who transact on our website and in some cases, their balance sheet for the last two years through their frequent transactions. We present the data to banks who extend credit and also offer working capital loans at an interest rate of 12-15%,” said R Narayan, chief executive of Power2SME, which recently on boarded Infosys co-founder Nandan Nilekani as a strategic investor.

“We are trying to create a digital SME system and will soon aggregate services from insurance companies, lawyers and human resources agencies,” said Narayan. Power2SME, founded in 2012, retails raw materials sourced from JSW Group and Steel Authority of India to about 3,500 small and medium businesses.

The new tax regime

Implementation of the Goods and Services Tax, replacing multiple layers of indirect taxation levied by various state and Central governments, will be critical to how SMEs view their sourcing needs. The Union government is determined to transition to GST from the next financial year.

When that happens, likely next year, what could work “in favour of ordering online is the fact that I don’t need to get involved in the intricacies of filing service tax, excise regulations for each state I am sourcing from,” said Uttam Strips’ Sharma, who sources hot-rolled steel on Power2SME.

With a single tax structure, small businesses will be open to online transactions that are traceable. “Most SMEs work in a cash economy. Implementation of GST will increase the number of SMEs looking to procure online and managing clean payments on the portal,” said Ashish Basil, partner, transaction advisory services, at consultancy firm EY.

“We have non-uniform units which a single order from an SME might contain,” said Rahul Garg, founder of Moglix, which retails finished tools, safety equipment and such products. “We have been building a multimodal platform with zonal and national partners.”

In recent years, firms involved in transporting industrial goods have improved their ability to adopt technology and aggregation capabilities because of the pressure from younger logistics firms riding the growth in the online consumer retail industry.

Also, there’s GST. “The probability of an SME in Chennai sourcing from a seller in North India with the best price will depend on the cost of logistics when GST comes into play,” said Basil.

Hurdles remain

For all the advantages of sourcing online, Sharma says he will not completely shift to digital vendors as he cannot afford to cut off his traditional network of suppliers. That’s just one of several challenges B2B e-commerce companies are trying to overcome.

Profit margins in the business are lower than for consumer internet companies, averaging 5-15% depending on the category. Compensating for that, however, are larger average order values of Rs 1,000-Rs5,500 for finished goods and running into several lakh rupees for raw materials..

Customer acquisition costs, too, are much higher because of the lower visibility of the overall enterprise e-commerce sector.

“In India, most B2B marketplace businesses are in the classified space. The limiting factors for ordering industrial goods online are discoverability, logistics and the willingness of SMEs to transact online given the level of penetration of cash transactions in the sector,” said Basil.

With improved efficiencies in allied sectors and a new tax regime, though, B2B e-commerce could be the next big thing, bringing together small enterprises and sellers for greater ease of doing business.